Monday, July 19, 2004
Bank of Japan maintains the status quo
The Bank of Japan's Monetary Policy Board left monetary policy unchanged Tuesday following a two-day meeting. The BoJ, which has a zero interest rate policy, said it was keeping its target on current account deposits at �30 to �35 trillion and that it would continue to provide ample liquidity beyond that target to ensure market stability. At a press conference following the meeting, Bank of Japan Governor Toshihiko Fukui said the Japanese government must show how it will handle the public debt problem and that it should show spending restraint. Japan's combined central and local government debt is expected to reach �719 trillion or 144 percent of GDP by the end of the fiscal year on March 31, 2005. Fukui repeated the bank's commitment to ending six years of deflation.
Growth is expected to exceed the BoJ's April forecast of 3.1 percent for the 2005 fiscal year, according to the Bank's latest estimate. The bank forecast that core consumer prices, which exclude fresh food, will fall 0.2 percent this fiscal year. Export growth has helped push unemployment to the lowest level in more than three years, bolstering consumer spending and fueling the longest recovery since 1997.
Global Markets
Investors showed signs of data fatigue as they were pummeled by a crescendo of second quarter earnings and third quarter outlooks along with some key economic indicators including sensitive inflation data. While the price data showed an overall easing of energy related inflation, the earnings data produced some worries as companies were less bullish about third quarter earnings. Equity investors are wary and are treading water given the confluence of earnings reports, higher crude prices, and political uncertainty inherent in the looming U.S. election - not to mention heightened security concerns ahead of political conventions and the Olympics. And the heavy vacation season is also upon us! On the week, three Asian indexes were barely positive - those in Japan and Singapore.
Global Stock Market Recap
Europe and Britain
European stocks dropped for the third week with technology companies hurting the most, as forecasts from Intel and others heightened worries that earnings growth in the industry may slow. Technology stocks are the worst performing industry group because investors think that demand may slow as interest rates go up and global economic growth eases. But a week of almost unremitting gloom in the IT and computer sectors of European stock markets ended on a more stable note after IBM soothed frayed nerves with a more upbeat report.
A flurry of broker downgrades added to some negative profits news and led to heavy selling pressure for IT stocks, especially at midweek. But the market was totally unprepared for the real shock of the week, which came in the form of another disastrous trading update from Nokia, the world's biggest manufacturer of mobile phone handsets. Friday brought a fresh burst of selling, provoked by a flood of broker downgrades as well as attacks on Nokia stock price targets.
The FTSE was down for a fourth successive week. Hopes for strong upcoming earnings results were undermined by several high profile profit warnings in the United States from pharmaceutical, software and medical device makers. Worries also remained about the extent to which pension funds were selling equities. The banking sector was the other main drag with many nervous about results ahead of earnings news, due to kick off in Britain next week.
Asia/Pacific
Asian/Pacific equity indexes followed here ended a wishy washy week on a positive note after mainland China's second quarter gross domestic product unexpectedly slowed to 9.6 percent when compared with last year from 9.8 percent in the first quarter. This calmed investor worries that the Chinese central bank would be forced to increase interest rates for the first time in nine years. A positive earnings report by chip-maker Samsung Electronics helped too. Three of the six Asian/Pacific indexes were up on the week - the Nikkei, Topix and Strait Times. Japanese stocks were helped somewhat by a proposed merger between two major banks. Hong Kong's stock market closed at noon on Friday because of a typhoon warning.
Currencies
After a relatively quiet week, the currency market burst into life on Friday, and the U.S. dollar once again took a beating. U.S. Treasury data revealed a net inflow into U.S. assets of just $56.4 billion in May, well down from the $76.1 billion recorded in April and not far in excess of the $46 billion a month needed to fund the huge trade deficit. The market had expected inflows to weaken because Asian central banks, which have scaled down their intervention in the currency market, have fewer dollars for U.S. asset purchases. On top of these data, further evidence emerged that the U.S. recovery is sputtering. Inflation abated in June, which disappointed traders who were looking for more rapid tightening by the Fed that in turn would push up U.S. yields. The dollar fell against all major currencies including the pound sterling, euro, and both the Canadian and Australian dollars - essentially all currencies that support higher yields.
The dollar fell to a four-month low against the euro after core consumer prices posted their smallest increase since December, fueling expectations the Federal Reserve will stick to its plan of raising interest rates at a measured pace. Compounding the dollar's losses was a report showing the smallest increase in foreign holdings of U.S. assets in eight months. The Fed's target rate for overnight bank loans, at 1.25 percent, is below Europe's 2 percent key rate. The low rates make U.S. assets less attractive than those in higher interest rate countries.
Even though the yen jumped on Friday, the currency declined for the second week in three against the dollar amid concern that falling purchases of Japanese shares by international investors will restrain demand for the country's currency. Offshore investment in Japanese stocks in the week to July 9th dropped 92 percent from the previous week according to the Finance Ministry. The Nikkei 225 stock average closed little changed on the week, leaving it down 3.6 percent so far in July.
Indicator scoreboard
EMU - June harmonized index of consumer prices was up 0.2 percent and 2.4 percent when compared with last year. Higher costs for hotels and restaurants and for recreation and culture were offset by lower prices for energy and clothing. HICP excluding energy, food, alcohol and tobacco was up 0.2 percent and 1.9 percent on the year. HICP excluding energy and unprocessed food - the preferred ECB's core measure - was up 0.1 percent and 2.2 percent on the year. The ECB's inflation target limit is 2 percent. All but three of the 12 EMU members were above 2 percent.
Germany - June wholesale prices were down 0.2 percent but up 3.5 percent when compared with last year. Many analysts tend to focus less on the WPI release because of the heavy weighting it gives to oil-related categories. The price declines were led by grains, seeds and feed prices, solid fuels and oil products and machinery and equipment. Prices for livestock and coffee, tea, cocoa and spices were up on the month.
France - May seasonally adjusted merchandise trade deficit was �263 million, less than April's �330 million deficit. Exports were up 3.2 percent while imports were up 2.9 percent. Exports were up for semi-finished and capital goods, with support from pharmaceuticals and autos. The sale of an ocean liner to Panama and a satellite to Kazakhstan offset the drop in Airbus sales.
May seasonally adjusted industrial output was up 0.2 percent and 3.4 percent when compared with last year. Manufacturing output increased by 0.5 percent and 3.6 percent on the year. A pick-up for semi-finished goods and autos offset a decline for capital and consumer goods. Excluding the construction, industry production was up 0.2 percent on the month. Eurostat uses the latter figure to calculate EMU production data.
Italy - May seasonally and workday adjusted industrial production was unchanged but up 2.7 percent when compared with last year. A decline in intermediate goods offset an increase in energy goods production. Production was up for petroleum refineries, means of transport and textile and clothing. Nine product categories were down including other manufacturing industries.
Britain - June producer output prices were up 0.1 percent and 2.6 percent when compared with last year. Core output prices were unchanged on the month but up 1.4 percent on the year. Producer input prices sank 1.6 percent but were up 3.3 percent on the year. Input prices were dragged down by drops in crude oil and imported parts and equipment.
June consumer price index was down 0.1 percent but was up 1.6 percent when compared with last year. The retail price index was up 0.2 percent and 3.0 percent on the year, while the retail price index excluding mortgage interest payments inched down 0.1 percent though it was up 2.3 percent on the year. The CPI, the Bank of England's inflation measure, remains under the 2 percent target rate.
Average earnings for the three months to April were up 4.4 percent, just below the Bank of England's target of 4.5 percent. Excluding bonuses, average earnings were up 4.2 percent.
June claimant count unemployment was down by 9,600. The claimant unemployment rate slipped to 2.7 percent from 2.8 percent in May. But unemployment as measured by International Labour Organization for the three months through May was up 6,000 when compared with the previous three months ending in April. The ILO unemployment rate remained at 4.8 percent. ILO employment in the three months to May fell 29,000 when compared with the previous three months.
Asia
Japan - June domestic corporate goods price index (CGPI) increased 0.3 percent and was up 1.4 percent on the previous year, the biggest increase since September 1997 and the fourth successive monthly increase.
Americas
Canada - May merchandise trade surplus declined to C$5.2 billion from C$7 billion in April. Strong machinery and equipment purchases propelled imports by 7.8 percent, a record high. The rise in exports was more modest but still marked the fourth consecutive monthly increase. They were up 1.3 percent. The trade surplus with the United States fell from C$9.1 billion to C$8.3 billion as imports grew more strongly than exports. Imports from the United States jumped 6.7 percent. Exports to the United States were up 1.6, a result of higher exports of lumber, natural gas and trucks. Excluding the United States, Canada ran a trade deficit of C$3.0 billion with all other countries. Imports increased from most major trading regions, particularly Japan and the newly expanded European Union.
May manufacturing shipments jumped 1.1 percent and 9.5 percent when compared with last year. The sixth consecutive increase was helped with a push from soaring industrial prices. Shipments increased in 13 of the 21 manufacturing industries, representing 60 percent of total shipments. Non-durable goods industries jumped by 2.6 percent, boosted by the price-inflated petroleum industry. Durable goods manufacturing was essentially unchanged. Unfilled orders edged back 0.2 percent largely because of the aerospace products and parts industry. Excluding the aerospace industry, unfilled orders were up 0.9 percent. New orders declined by 0.8 percent, the first decline since November.
June consumer price index was up 0.1 percent and 2.5 percent when compared with last year. The core CPI which excludes food and energy was up 0.1 percent and 1.5 percent on the year. Upward pressure was exerted by higher prices for shelter, food, alcoholic beverages and tobacco products and health and personal care. Partially offsetting these increases were lower seasonally adjusted indexes for transportation, household equipment and furnishings, clothing and footwear and recreation, education and reading. The CPI excluding the eight volatile components identified by the Bank of Canada increased 1.7 percent on the year. The Bank has a control target of 1 to 3 percent for consumer price inflation.
Bottom line
The Bank of Canada will announce its interest rate decision on Tuesday. The bank's rate is expected to remain at 2 percent, 75 basis points above the U.S. Fed funds rate. The Bank of Canada eased policy for a third time by 25 basis points on April 13th. At the time the economy was growing substantially under its 3 percent potential and inflation was virtually non-existent. Expectations of continued sluggish growth and low inflation supported the widespread expectation that the policy rate could be held steady at a 46-year low until early 2005. But things changed rapidly and now growth is picking up and inflation shows signs of increasing. On Thursday, the latest Monetary Policy Report is to be released and it is expected to show upward revisions to both the growth and inflation forecasts. This leads to the conclusion that rates will soon begin to climb towards neutral - estimated to be at about 4 percent in Canada.
Looking Ahead: July 19 through July 23, 2004
Investors fret